We’re back with part 2 of the Ask Me Anything Answers from last weeks blog. Lets get right to it.
Divergences
Tesjinder asks if I have a preference for daily vs weekly charts when looking at divergences. The short answer is – I like to use both charts, and the illustrations below may help you understand why that is. Divergences are typically observed in the classic momentum studies. We look for a momentum study that is diverging (moving in opposite direction) to the trend of the market. That can signal a pending change in trend or a correction/ breakout. There are probably a couple of dozen momentum indicators out there. Each have strengths and weaknesses. I tend to use stochastics for my fastest moving indicator, followed by RSI (mid-termed speed of reaction) and finally MACD for the big picture moves. Go to stockcharts.com and read up on how these are constructed for greater clarity on how they work.
To start, I think we need to accept that a daily chart with the indicators noted above is going to provide only short termed information. Weekly charts are better for spotting the more significant moves. For example, the RSI default that most of us will use is a 14- period lookback. There’s quite a difference between looking back 14 days vs 14 weeks for a momentum comparison! For illustration, I’ve printed a daily and weekly chart for the Dow Industrials below, with the same indicators.
The daily chart below shows us that the shorter indicator, stochastics, was flat to rising along with the market before the COVID crash this year. However, RSI was diverging negatively. The opposite happened coming into the market selloff this month (September). Note that stochastics diverged negatively against the INDU in August, while RSI rose, confirming the uptrend. Meanwhile, MACD didn’t provide any heads up over these two corrections (COVID crash or September pullback). So you want to have a few indicators on your chart, and not rely on just one when watching for divergences.
Now the weekly view, same indicators. Note that the longer-view (slower moving) indicators like RSI & MACD signaled the big selloff at the end of 2018, whereas Stochastics more or less just followed the market. Then, we got no divergence signals at all on the weekly chart coming into the COVID crash. In this case, the daily chart was more accurate:
How to sell
Buying stocks is the fun part of this game. There’s the excitement of the moment, the anticipation of profits to come, the fundamental research of the story to capture your imagination. Its like buying a new pair of shoes, except there’s more adrenaline! But there’s always the less sexy side of the game, which is knowing when to sell. John asks how we take profits on a position. I’d like to extend that question by covering how to take losses. That’s less fun, but more important! John – I wrote an excellent (in my humble opinion) blog on the topic of selling. Here is the link. May I encourage EVERYONE reading this blog to click on that link and read the page? Its SO important!!!!
John also asks if one can earn a living swing trading. The answer is yes – I met a guy who earned a bunch of money as a stock broker in Toronto, then took the money and moved to a tropical paradise. Now he trades for a living. Living the dream! There’s a catch: You have to have a good system. You need to be like our stockbroker friend and learn to trade. As the saying goes, don’t quit your day job….Yet. Hope that helps!
Canadian vs. USD projections
Final question for today. Sam asks for my technical outlook on the Canadian / USD exchange rate.
I’d like to draw your attention to some bigger thematic research done by BearTraps – which I’ve quoted in the past. Here is the link to that big-picture outlook. Its worth reading. Also, I did post one of my rants on Canada’s situation a few months ago. My big picture view is equally bearish to that of BearTraps. Here is the link to that rant.
All of that big picture background stuff aside, lets take a look at the neartermed technical picture. The chart below will be familiar to regular readers of this blog. Its quite amazing how predictable the loonie’s trends have been. I drew the blue horizontal line on that chart many years ago. Look how many times the loonie has found resistance at, or just above, that level. And here we go again. The loonie ran right up to the blue line (just under $0.78) before failing recently. The big red downtrend line was recently penetrated. This implies that the next support level (first green line below the blue horizonal line) is likely to offer support. Thats around $0.72. Again, I drew those green lines many years ago – and its been amazing to see how 0.72 and o.68 seem to hold.
Bellow is the C$ seasonality chart, courtesy of Equityclock. Jon Vialoux points out the tendency for the loonie to weaken from about now (September) into the early part of the new Year. This adds impetus to my technical observations of a 0.72 support target.
Last Friday’s surge in volume
Pierre asks about last Fridays high volume, and how significant it was. Actually Pierre, last Friday was a “Quadruple witching” day, where you had options, index futures, stock options and index options all expiring. It all adds up to tons of buying and selling of positions as many options are exercised. Hence the volume.
One more to go
I’ll do one last blog – probably on Thursday, to cover two questions. Both were concerning commodities, so I’ll combine them into one subject and do lots of interesting charts around that asset class.
